Searching for Support

After another ugly week of down-side, reports all over the internet insist the futures are indicating a drop for the US stock markets today. Will it happen? Maybe.

Over the weekend stocks dropped in Europe, China, Japan and the like. US Futures were also down about 1% or so from Friday’s close. But futures have climbed back to about even overnight. This puts the markets in an interesting spot.

The 2630ish level was a big one as it markets the October and November low points for the SPX. The index has now visited this level 4 times. The prior three times markets found support and rallied. The fourth time was last Friday – and the markets closed at this level.

So, does the market rally from this point? Trade sideways? Or is there more downside?

From a technical perspective, it’s difficult to call. The short-term signal is for a bounce higher from here. Markets appear over-sold, and the news driving things down appears to be more about rumors than it does about economic data. If one wrong utterance about China and trade can take the markets down 100 SPX points, one has to wonder what a right utterance could do.

Longer term, the technical picture is concerning. It’s a tale of two big-picture events. Does the bull market regroup can go higher, or are we in for a more significant big-picture pull back (aka bear market)? And IF it were a bear, how far does it drop from here? On one hand, there’s a figure of about 27% decline. On the other, more than 40%.

The thing is, the economic data doesn’t support a 40% pull-back. It just doesn’t tell this story. Even if you can squiggle some lines on charts and talk about how this could happen, what economic reality must come to pass in order to generate such a mess?

Answer: who knows? We can all speculate. Perhaps it’s the failure of a major state pension plan. Perhaps it’s a full-blown trade war with China. Perhaps it’s a nuclear missile launch from North Korea. Whatever the black swan event, it’s not ‘known’ by the markets. So it’s tough to call it priced in.

At this point, the markets have priced in a lot of bad news. Multiples have fallen. Many stocks are in bear market territory. And, in many cases, if it weren’t for the cap-weighted nature of the indexes, you’d see that many of the non-mega-cap stocks have already gone through bear-like corrections.

This week should be interesting. If 2630 or so holds, it’s a good sign. If not, there’s little indication where the next level of support is. We will likely re-visit the February lows for the market. For the SPX, that’s another 100 points of downside from here (or just under 4%).

Get your Santa rally caps on. This market may need it.

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